The South African Civil Society Information Service

How South Africa's State Owned Enterprises Drive Up Inflation

By Glenn Ashton · 20 Sep 2011

Picture: www.news.mobilitate.co.za

The state has become a major driver of inflation. Our state owned port, railway, road, power and airport authorities have each increased prices at rates that far exceed our targeted or actual inflation rate. Consequently these so-called State Owned Enterprises (SOEs) collectively fuel further downstream inflation.

How does it benefit South Africa if government fiscal policy, supposedly focused on inflation targeting as a key fiscal instrument, is ignored, not only in the breach but in practice by the government itself? This case of double standards indicates a lack of seriousness in pursuing the purported fiscal conservatism repeatedly trotted out as an inflexible central pillar of our economic policy. 

Perhaps the most damaging example of this state-sanctioned inflationary pressure is Eskom. Here the government has permitted the National Energy Regulator to allow five year average increases of over 27% per annum, more than four times above the targeted rate of inflation of 6%. These increases are in turn four times greater than Eskom’s previous tariff increases over the twenty years prior to that (1988 – 2007) of around 6.5 % per annum. 

Eskom, cheered on by an ill informed coal and nuclear energy fixated cabinet, insists that it has had to increase prices to realistic levels. The reality is that we, the citizens of South Africa, are bailing out a monopoly supplier, landed in its present crisis through poor political leadership. This is no different to the citizens of the OECD bailing out a banking system their political leaders refused to rein in.

If a private sector company had insisted on similar levels of price increases – say in the food or construction sector – investigations would have been ordered and aspersions cast. The reality is twofold: one, that Eskom has failed to properly manage its mandate to provide power, and two, that the state is subject to different fiscal constraints than it places upon on private businesses. 

There was severe criticism by labour, progressives, civics and citizenry – of the rejection of the progressive Reconstruction and Development (RDP) project in favour of the business and Washington Consensus-friendly Growth, Employment and Redistribution (GEAR) policy. The inefficiencies of our SOEs are primarily the result of the past 15 years of muddled policies and strategies, combined with poor leadership. 

Any growth that arose out of the GEAR programme should not be assumed to be a reflection of its success; any growth we experienced was rather the result of a global economy which ran on steroids until 2008, with a hiccup or two along the way. Our economic growth happened in spite of, rather than because of GEAR. This reality is exposed by our stagnant employment figures and poor records of land and wealth redistribution. Sure, social services delivered some benefits to those most in need but the reality is that only a coterie of the politically connected elite really scored. 

If it was only Eskom that had emerged as a major inflationary driver perhaps the government could claim it is an aberration. Sadly this is not the case. Almost every SOE, without exception, has driven inflation, either directly or indirectly through sheer inefficiency. 

The saga of the new Transnet Durban to Gauteng fuel pipeline is a case in point. This has more than doubled in cost, from an original estimate of R11bn to R23.5bn and is two years behind schedule. The controversial Canada/ USA oil sands pipeline, twice as long and large, will only cost around 35% more than our new fuel pipeline! This is indicative of how poor management literally fuels inflation and erodes competitiveness. 

Transnet’s railway operations have also failed to transform. Both the government and private sector insist Transnet’s rail operations be split from the port operations of its dysfunctional bed-mate Portnet, which controls our ports. Predictably, Transnet’s management insists all is hunky-dory. 

The only consistently profitable rail services are those with captive interests such as the Sishen Saldanha line and the Richards Bay coal lines. Even so, the coal line has consistently failed to meet desired coal industry targets and has consequently failed to meet the demand of the recently expanded Richards Bay Coal terminal. The strategy may be good to reduce global warming but it is not good for business. 

Our extensive branch line rail network is in decay and vastly underutilised. The railways have wasted their potential to open up neglected areas of the country, like the apartheid homelands, to economic opportunity. Mainline rail routes from our ports to Gauteng are overpriced, inefficient and underutilised, displacing traffic onto the roads, with increased fuel and toll costs passed on to consumers and industry. 

Rail commuter routes remain in disarray, with infrastructure and rolling stock more associated with the struggle years than the 21st century. This leads to unpopular and unreliable commuting, reduced custom, increased passenger mile costs and inevitable decline. Where do potential rail users go? They hit the road, jack.

Yet SANRAL, the state operated road agency, is equally inflationary. This occurs directly through high tolls and indirectly through the multiplier effects on manufacturing, distribution and consequent costs to business. 

The Gauteng regional road toll system remains hugely controversial and will sharply increase inflationary pressure in our economic heartland. Similarly the City of Cape Town has declared a dispute with SANRAL over its proposed tolling of the N1 and N2 arteries into the city and the disruptive and inflationary impacts of those.

Road transport is effectively double-taxed. Firstly there is a fuel tax that should be ring-fenced but instead has been absorbed into the general fiscus. Second the most direct routes are tolled. There is a powerful argument to revert to only a fuel tax. Heavy vehicles will pay proportionately for their impact on the road. Imbalances could possibly be retrieved through licensing fees.

The hard pressed public and business communities are in a catch 22. On the one hand there is inefficient or expensive rail infrastructure, on the other, increasing road costs. The end result is the erosion of our international competitiveness.

Portnet, responsible for port management, fares no better, undermining competitiveness through the double whammy of inefficiency and high costs. Our ports are the most expensive in the world, more than double the global average. To lay pain on the injury, our ports are amongst the most inefficient globally, with container handling speed well below half the global average. We end up paying twice as much to get half as much done, hardly a recipe for success.

The recent expansion and upgrade of Cape Towns container terminal has been slated for purchasing equipment that will halt container handling when winds rise above 70 kilometers per hour. This is common in summer, when the fruit export season is at its peak. Brilliant.

Splitting the rail and port management networks may provide an opportunity to rectify the situation. However, as far back as 2001 Minister Radebe promised that Portnet would soon be up to speed. A decade later we still have lots of promises with little action.

A similar malaise besets our airports, run by the Airports Company of South Africa (ACSA). They are not only amongst the most expensive in the world but have proven intractable in the face of ongoing pilfering of customer’s bags. We pay dearly for this privilege. ACSA passenger fees have doubled over the past five years and are being topped off with a whacking great 70% hike this year, with more shocks promised. Airline passengers can only mutter about the stratospheric prices we pay in the airport retail outlets, due to inflated rentals.

Another hidden cost increase to our air transport infrastructure is the proposed 65% increase demanded by the South African Air Traffic and Navigation Service, which we rely upon to prevent aircraft coming into contact with each other. Yet another SOE fuelling inflationary trends.

So what do we do? Privatise? Private investors will constantly seek investments that outpace inflation to protect their capital. This is why large, successful corporations are among some of the primary drivers of inflation; they have to increase profit above inflation levels to attract investment. 

There should be no such incentive for monopolistic SOEs. These were meant to provide essential services to citizens and the state, through government approved mandates. Their portfolios are meant to be efficiently and carefully managed. 

Whenever SOEs fail in their mandate, free market and neo-liberal proponents insist the private sector could do a better job than these essentially nationalised monopoly industries. 

This may be so but the countervailing reality is that putting a monopoly in the hands of a profit driven capitalist is an invitation for trouble. Besides, doing so would be antithetical to both good governance and our Competition law.

So what can we do with our inefficient and dysfunctional SOE’s? We cannot lay this problem at the door of the bogeyman of corruption. Instead, these problems are the result of inconsistent and sometimes conflicting policies and consequent inefficiency.

For instance, can we have state policy premised on GEAR and also have state SOEs which are expected to run as efficiently as private enterprises? On the face of it such expectations are inherently contradictory. 

There is a strong argument that we should, instead of placing huge pressure on narrow economic sectors, enable the developmental state through a broader, more equitable series of cost offsets. But then, where does responsibility lie, especially when we are seeking market driven models of efficiency that are not being achieved?

The countervailing argument is that there are many countries around the world that do efficiently manage their SOEs. Could we learn from them? Of course there are risks we may incur hidden costs by adopting models unsuited to our inflexible labour and policy constraints. Yet, at the 2009 Polokwane conference, Alec Erwin pointed out how important SOEs were to economic development. The question then follows, “quo vadis” Mr Erwin?

Perhaps through honestly admitting and recognising both the historical and the more recent failure to manage these strange beasts which are SOEs, we can start to change the models and mindset. If we are going to embrace change we must be determined to change. We certainly cannot have SOEs undermining our economic development as is presently the case. 

Attempting to obtain a different outcome by doing the same thing is madness. There certainly are other ways to skin these fat, lazy cats upon which we depend to keep the country running. Must we resign ourselves to the fact that we cannot and shall not ever be competitive in the global arena? This is clearly not an option. 

One thing is for certain – business and individuals have reached the limits supporting these entities that simply erode our competitiveness. We can no longer afford not to change the way our SOEs are run.

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